Observations on economics, the academy, the wider world, and things that run on rails.

2.9.07

OVERTAKEN BY EVENTS. At the time of John Kenneth Galbraith's death, I checked out The Affluent Society, in paperback, from the library. That it is only now the subject of Book Review No. 30 might alert readers that the content has not aged well. The book, which years ago was quite popular with social scientists other than economists, is an at times disjointed look at the coexistence of private plenty with public paucity. Consider a summation, which is at p. 257 of the Mentor paperback edition soon to be back in the library's collection.

Here is a paradox. When we begin to consider the needs of those who are now excluded from the economic system by accident, inadequacy, or misfortune -- we find that the normal remedy is to make them or their children productive citizens. This means that they add to the total output of goods. We see once again that even by its own terms the present preoccupation with material as opposed to human investment is inefficient. The parallel with investment in the supply of trained and educated manpower discussed above will be apparent.

Professor Galbraith was not alone in suggesting, not that long after the end of World War II and the Depression, that the lesson business learned from the Depression was the stimulation of demand, consequences be hanged, so as to preserve labor peace and shareholder value. Vance Packard's The Hidden Persuaders, of approximately the same vintage, is able, as it makes no pretension of academic detachedness, to be even more polemical, if just as wrong in hindsight.

To Professor Galbraith and Mr Packard, and the ranks of their disciples, the error of business is in stimulating demand for their stuff, never mind that it's bidding resources away from the public sector, or inducing consumers to engage in positional arms races over stuff they really don't need, and never mind (to invoke an inchoate argument in Affluent Society that emerged a decade later) the environmental consequences. In hindsight, that argument isn't quite right. All the cleverness of Batten, Barton and all the resources of General Motors don't stop consumers from rejecting badly built or fuel-guzzling cars, even if the mauve-and-cerise gives way to earth tones, or the air conditioning is improved, particularly if the power brakes don't work well, and it doesn't preclude consumers from shopping for other conveniences (mobile phones! portable computers! command control for model railroads!) not pushed on us by the existing Fortune 500.

Where Professor Galbraith misses the point is clear in the paragraph that follows.

But increased output of goods is not the main point. Even to the most intellectually reluctant reader it will now be evident that enhanced productive efficiency is not the motif of this volume. The very fact that increased output offers itself as a by-product of the effort to eliminate poverty is one of the reasons. No one would be called upon to write at such length on a problem so easily solved as that of increasing production. The main point lies elsewhere. Poverty -- grim, degrading, and ineluctable -- is not remarkable in India. For few, the fate is otherwise. [In 1957, perhaps. Today the Principle of Increasing Opportunity Cost bites on the prosperity-by-production efforts of India and Red China.] But in the United States the survival of poverty is remarkable. We ignore it because we share with all societies at all times the capacity for not seeing what we do not wish to see.

Cue the Simon and Garfunkel! In 1957, that hidden-persuader-planned-obsolescence truce between the Big Four automakers and Detroit workers was still making southeastern Michigan one of the more prosperous places to be. When the persuasive powers ran afoul of improved choices elsewhere, the reaction of persuaders and producers alike was to attempt to shut off the competition, rather than to augment the human capital. Perhaps those private persuasive powers are not the sole cause of private affluence amid public squalor.

But what of that human capital investment? I turn to page 214.

Nearly all of the investment in individuals is in the public domain. And virtually all of it is outside the market system. It is the state which, through primary and secondary schools, and through the colleges and universities, makes the largest investment in individuals. And where, as in the case of private colleges and universities, the state is not directly involved, the amount of the investment is not directly related to the eventual pay-out in production. Investment in refineries being higher than in textile mills, the refineries will draw investment funds. But engineers to design the refineries may be even more important -- in effect yield a higher return. And the highest return of all may come from the scientist who makes a marked improvement in the refining process. These are not imaginative possibilities but common probabilities. Yet the high return to scientific and technical training does not cause the funds to move from material capital to such investment.

It doesn't? And does such investment have to be "in the public domain" as Professor Galbraith suggests, and therefore a legitimate function of government? Or might there be sufficient private benefits for technically-inclined individuals to respond efficiently to the incentives?

So why, then, the continued popularity of Affluent Society type arguments? They do appeal to the sort of individual who might be indisposed toward the business community or the messiness of emergent order, as well as to the individual who finds Welfare Economics Paradigm models of state action compelling. But fans of such arguments might do well to understand the Baumol cost disease argument, particularly as it applies to government services, as well as the public choice argument that government services might be inadequate because the incentives to make them adequate don't have the same force that market incentives, including those that impinge on concentrated industries do.